IRS Releases Tax Reform Regulations

The IRS has just provided us with some summer reading that might finally begin to give us guidance on parts of the tax provisions enacted in the TCJA last December. We’re early in the process of fully digesting this guidance, but wanted to at least share the highlights of two of the provisions that will affect many businesses and individuals, as well as sharing our thoughts on what’s on the horizon for Tax Reform.

Pass-Through Deduction

On August 8th, the IRS released the long anticipated proposed tax reform regulations regarding the new 20% deduction on “qualified business income” (QBI) from pass-through entities. Also released with the 184 pages of proposed regulations was IRS Notice 2018-64 providing guidance on how to compute W-2 wages in connection with the deduction, as well as posting frequently asked questions for this deduction on their website.

The deduction applies to owners of sole proprietorships, partnerships, S-corporations and some trusts. To summarize, at a very high level, this guidance;

Provides that all small business income below $315,000 for married couples filing jointly (and $157,500 for single filers) is eligible for the deduction,

Defines who is eligible to take the deduction when filers exceed the income thresholds, including, which “specified service trade or business” (SSTB), with income above the threshold, will qualify,

Phaseout is complete when an owner’s taxable income reaches $207,500 ($415,000 for married joint filers). At that point: 1) QBI deductions for a nonservice business must be based on the business’s W-2 wages or its W-2 wages plus the basis of qualified property used in the business, and 2) no QBI deduction can be claimed based on income from a specified service trade or business (SSTB), as defined below.

Provides options to aggregate income from similar businesses owned by the same person,

Aggregating businesses can allow an individual with higher taxable income to claim a larger QBI deduction when the limitations based on W-2 wages and the UBIA of qualified property would otherwise reduce or eliminate the allowable deduction.

Allows a de minimus exception to businesses that earn only a small percentage of SSTB,

SSTB is a trade or business that performs services in one or more of the following fields: health; law; accounting; actuarial science; consulting; financial, brokerage, investing or investment management; trading; performing arts; athletics. In addition, an SSTB can be any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.

Outlines several exceptions and rules in the service fields (ex.) Health Clubs and Insurance Agents would be eligible and provides guidance on computing the deduction.

100% Bonus Depreciation

On August 6th, the IRS released proposed regulations providing guidance on the newly enacted increase to the allowable first year depreciation for “qualified property”. Under the new law, businesses can write off the entire cost of qualifying assets purchased and placed in service after September 27, 2017. This benefit will be phased out starting in 2023. One glitch that was not fixed in the proposed regulations was the inadvertent “qualified improvement property” (certain leasehold improvements).

There is still much more in this tax reform guidance to absorb. We’ve only begun to scratch the surface. The IRS will be issuing additional proposed regulations and various other forms of guidance on the TCJA. We will keep you updated. If you have questions about your tax situation, please contact Steve Gallant or Scott Sagan.